Looking for ways to invest $100,000?
Perhaps you’ve just inherited a large windfall, received an enormous profit-sharing check from work, or downsized when you sold your home. Or maybe you’ve been a really diligent saver and noticed your bank account now has six digits.
No matter how you got there, deciding what to do with $100,000 (or more) is not something to be taken lightly. Below are some of our best tips for how to invest $100,000 and get a maximum return. But first, let’s discuss some prerequisites.
Before You Start Investing
Financial advice is not “one-size-fits-all.” The amount of money you invest can impact how you make decisions. For example, investing $1,000 is a lot different than investing $200,000. Additionally, you need to consider your personal investing preferences and goals.
Before you start investing, you need to consider two things:
- Your Timeframe
- You Risk Tolerance
First off, what is the timeframe for your investment? Do you want to start cashing out in one year, ten years, or more? Understanding your timeframe is important for two reasons.
First, it helps you ignore some of the noise of day-to-day fluctuations in your investment. For example, if you invest in a stock with a ten-year time horizon, you really shouldn’t be worrying about what it does in the next month or year. You’re holding for a decade and should be prepared to accept the short-term volatility.
Once you’ve determined your timeframe, you also need to consider your risk tolerance. Risk tolerance can be defined as the amount of downside you are willing to accept in an investment. Can you stomach a 10% drop in your investment? 30%? 50%?
Obviously, the goal of investing is to make money, but the majority of investments carry risk (meaning you can lose money). This is normal and should not deter you from investing, BUT you need to define your acceptable risk threshold before you start investing.
Generally, risk and return are correlated. Higher reward investments come with higher risk, and vice versa. For example, if you want to double your money in 2 years, it’s nearly impossible to do so without exposing yourself to higher risk. Contrarily, if you want to average 5% annual returns, you may be able to find lower-risk investments that minimize drawdowns.
So, before you determine the best investments, you need to answer the following questions:
- What is my timeframe? (i.e. when do I want to start cashing out on this investment?)
- What is my risk threshold? (i.e. what type of drawdown am I comfortable with?
With that said, let’s start discussing some of the best investments.
1. Pay Off All of Your Debts
When most people think of “investing,” they think of buying – buying stocks, buying real estate, etc. The truth is you shouldn’t be buying assets that make you money until you unload liabilities that cost you money.
For example, if you can make 10% in the stock market, that’s great. However, if you’re paying off credit card debt at a rate of 20% APR, you are better off eliminating your debt first. Your debt is costing you more money than your investments are making you, therefore, the most strategic financial decision is to eliminate your debt.
According to CNBC, the average American now carries approximately $38,000 in personal debt (excluding home mortgages). That could be from any number of sources, including credit cards, student loans, car loans, etc.
If you’ve come into possession of $100,000, then you’re definitely going to want to use that money to pay off your debts. Start by looking at your high-interest debts first like credit cards or personal loans. Getting rid of a credit card balance that carries a 30 percent APR is almost like making an investment that pays you 30 percent because you’ll save yourself from having to pay back all of that interest.
Even if you’ve got debt that carries a relatively low APR (such as an auto loan), pay it off! In addition to interest reduction, another great reason to pay off your debts is that it frees up cash flow from your budget. For example, if you were making car loan payments at $500 per month but then paid off the entire balance, that’s $500 more per month that you can do whatever you want with!
2. Payoff Your Mortgage
Your home is your castle. But financially, it can also be a giant ball-and-chain. That’s why, for many people, paying off your mortgage has been regarded as one of the hallmarks of financial independence.
Whether you’re a millennial or a Gen Xer, the average mortgage balance is between $224,500 and $238,344 according to BankRate. Though $100,000 isn’t going to completely erase your mortgage, it will definitely put a significant dent in your loan and save you thousands of dollars of interest in the process.
There’s a caveat here. You should consider your mortgage rate before paying it off. If you are fortunate enough to have a low rate (i.e. less than 3%), it may make sense to keep paying your mortgage so you can save your funds for investment.
Here’s a simple way to figure it out:
Do your investment returns (%) exceed your mortgage rate (%)? If yes, no need to pay off the mortgage early. If no, then paying off your mortgage (or at least a chunk of it) will keep more money in your pocket in the long run.
3. Invest In Your Retirement Funds
Anytime you come into money, one of the best places to shield it from taxes is to take advantage of your tax-advantaged retirement accounts. That would mean putting the money into your 401(k) and IRA. Investing in your retirement is always a good idea.
Since the IRS puts annual contribution caps on your retirement accounts, you’ll have to be a little bit creative about how you move the money into these plans. Here’s how I would recommend doing this:
- Max out your 401(k) for the current year by increasing your contribution level for the year and then using a portion of your $100,000 to cover the difference of the money that’s now missing from your paycheck. The annual contribution limit is $19,500. If you’ve got a spouse, then max out their plan too using the same method.
- Max out your IRA for the current year using a portion of your $100,000. The annual contribution limit is $6,000. If your spouse also has a plan, then max that out too.
- For the following year (and beyond), repeat this process of maxing out you and your spouse’s 401(k) and IRA until the entire $100,000 has been filtered through.
Though that may seem like a lot of effort, believe me, it’s well worth it! If you generally pay approximately 25% of your income to taxes, then by moving your money through your retirement plans, you could be saving as much as $6,375 in taxes each year.
Plus, don’t forget: The more money you contribute to your retirement plans, the more potential your investments have to grow and compound over the years.
4. Create A Serious Emergency Fund
Another good way to invest $100,000? An emergency fund! Most financial experts recommend that your emergency fund should contain 3 to 6 months’ worth of your living expenses. If you earn $100,000 per year, that’s as much as $50,000 you should have stashed away.
For a lot of people, that’s just simply not a reality. But if you’ve got $100,000 to work with, then it’s game on! You could park a significant portion of this money into a high-interest savings account and rest knowing in complete confidence that you’d be financially prepared to take on nearly any emergency that comes up.
Technically, this isn’t an “investing” tip, but it can significantly improve your standard of living. An emergency fund adds peace of mind that can make your life a lot easier. If you have living expenses saved, you don’t need to be worried as much about surprise expenses, increased costs of living, and paying the bills.
5. Assemble A Dividend Stock Portfolio
If you’d like to see a more immediate return on your $100,000, then what you need to start doing is investing in some dividend stocks.
When you invest in dividend stocks, the company pays you a percentage of the earnings they make every quarter just for simply being a shareholder. All you have to do is own the stock and the company will send you a check every quarter. You can truly make simple passive income from dividends!
If you invested the full $100,000 into a dividend stock portfolio with an annual yield of 4 percent, then you could expect to be paid $4,000 every year (or $1,000 per quarter).
While that might not seem like a ton of money for a $100,000 investment, keep in mind that dividend stocks have the same potential to grow over time just like any other stock. For example, let’s suppose that the overall stock price rose an average of 6 percent for the year. That means your $100,000 would now be worth $106,000, and between the dividends and capital gains, you actually net a $10,000 gain.
How To Buy Dividend Stocks
There are lots of great places where you can go to invest in stocks:
- Full-service brokers such as Vanguard and Fidelity
- Discount brokers such as E-Trade or TD Ameritrade
- Robo-advisors such as Betterment, Wealthfront, and M1 Finance
Dividend stocks are generally considered a bit safer than growth and momentum stocks, so they can be a great addition to any stock portfolio.
6. Invest in Stocks
While dividend stocks guarantee income (and are generally regarded as “safer”), they don’t always match the returns of growth and momentum stocks.
If you have a long-term investing horizon, you may consider investing in a few non-dividend stocks.
Keep your risk tolerance in mind as certain stock investments can be risky. That said, if you choose great companies and have a long-term time horizon, stocks can generate exceptional returns.
How do you choose which stocks to invest in?
You have a few options.
First, you can do research online to find which stocks are recommended by analysts and expert investors. You should do your own research as well, but this can be a great starting point.
You can also consider the companies you believe in and do your research to determine whether or not they may be a good investment. For example, if you believe in Apple, you may consider buying some shares of Apple’s stock.
Lastly, you can invest in mutual funds and ETFs. Mutual funds and ETFs are baskets of stocks that you can invest in as easily as you can invest in individual stocks. For example, the ETF that trades under the ticker “SPY” is a basket of the top 500 publicly traded companies. When you buy shares in SPY, you are technically buying shares in 500 companies.
You can find mutual funds and ETFs for a variety of investment themes, ranging from technology to utilities. Decide what sector you want to invest in and find an ETF to match.
7. Buy Rental Properties
If starting a side hustle sounds like something that you’d like to get involved doing, then $100,000 could go a long way towards buying your first (or even multiple) rental properties.
Let’s say you bought a house using all of the $100,000 and took out no mortgage. Now, not only do you not owe a bank any interest or mortgage payments, but you also get to keep almost all of the money your tenants pay you (minus taxes and maintenance of course). That means you’d both own an asset containing $100,000 of equity as well as enjoy $500 to $1,000 of rental income per month.
But why stop there? You could buy two properties using $50,000 as a down payment for each one. Though you’d most likely have to take out a mortgage for each property, the payments would likely be relatively low. And you’d have two sets of tenants which means double the rental income!
REITs – The Real Estate Alternative
If you’d rather not deal with tenants or property directly, then you could always invest in a REIT (real estate investment trust). This is a special type of fund where investors pool their money to purchase groups of various real estate assets. You can easily purchase them through most brokers and robo-advisors.
8. College for Your Children
If you have children under the age of 18, think about all the hassle you could save them with student loans by putting your $100,000 away for college.
In the U.S., the most tax-efficient way to save for your children’s college is to use a 529 plan. A 529 plan works similar to a Roth IRA, but instead of retirement it’s intended to pay for college. When you invest the money, you don’t pay any taxes on the earnings as long as you use them for college-related expenses.
Every state offers its own version of a 529 plan. Check online to find out how you can get started with yours.
9. Buy or Start a Business
Lastly, if you want to put your $100,000 to work, you could consider either buying a business or starting your own.
Before you choose to go down this route, you need to make sure you have a solid game plan. Buying or starting a business without a plan is a recipe for disaster.
If you are considering running a business, make sure it caters to your strengths. Here are some example of businesses you can start:
- Service Business – Consulting, Digital Services, Etc.
- Selling Products – eBay, E-commerce, etc.
- Online Business – Software, website, etc.
If you think of a business that is a good match for your skillset, you can choose to start your own business or buy an existing business. There are benefits to both.
When you start your own business, you control everything. You also save the initial investment of buying a business, however, there will still be start-up costs. Starting your own business is definitely the more cost-effective approach, but there are benefits to buying a business as well.
When you buy a business, you are acquiring a business that is already successful. The business already proved itself and should continue generating income from day one. For example, if you wanted to start a coffee shop, you could do your research and create a plan to start your own. Alternatively, you could buy a business that is already successful. This will save you a lot of time and it will help you start generating income right away. Of course, you need to get a good deal and you need to make sure you are equipped to run the business to continue its success.
Final Thoughts: How To Invest $100,000
Now you know some of the best ways for how to invest $100,000. There are so many investment opportunities to put your money to good use. Maybe you don’t have quite that much though, or are simply looking to invest less? If so, you may enjoy our article on how to invest $1,000.